<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-QT
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
OR
(X) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
---------------------------------------------
FOR THE TRANSITIONAL PERIOD FROM AUGUST 1, 1998 TO DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-25016
T-NETIX, INC.
-------------
(Exact Name of registrant as Specified in Its Charter)
COLORADO 84-1037352
- ---------------------------- ----------
(State of Other Jurisdiction (I.R.S.Employer
of Incorporation) Identification No.)
67 INVERNESS DRIVE EAST
ENGLEWOOD, COLORADO 80112
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 790-9111
--------------------------------------------------------------------
Indicate by check (X) whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
and Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days Yes (X) No ( )
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at February 9, 1999
------------------------------- -------------------------------
Common Stock, $.01 stated value 8,558,067
<PAGE> 2
T-NETIX, INC.
FORM 10-QT
INDEX
<TABLE>
<CAPTION>
PART ITEM PAGE
- ---- ---- ----
<S> <C> <C>
I. FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheets, December 31, 1998
and July 31, 1998 (Unaudited) 2
Consolidated Statements of Operations, Five Months Ended
December 31, 1998 and 1997 (Unaudited) 3
Consolidated Statements of Shareholders' Equity, Five Months Ended
December 31, 1998 and Year Ended July 31, 1998 (Unaudited) 4
Consolidated Statements of Cash Flows, Five Months Ended
December 31, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
3. Quantitative and Qualitative Disclosures About Market Risk 17
II. OTHER INFORMATION - Items 1 through 6 18
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, July 31,
1998 1998
------------ --------
(amounts in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 463 $ 415
Accounts receivable, net of allowance 11,510 10,293
Prepaid expenses 595 487
Investment -- 1,343
Property and equipment, at cost:
Telecommunications equipment 43,439 42,435
Construction in progress 4,078 3,163
Office equipment 5,758 4,937
-------- --------
Property and equipment 53,275 50,535
Less accumulated depreciation and amortization (27,728) (24,756)
-------- --------
Property and equipment, net 25,547 25,779
Patent license rights 1,877 2,085
Software development costs, net 3,016 1,458
Goodwill 2,173 --
Other assets, net 3,482 2,813
-------- --------
$ 48,663 $ 44,673
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable $ 3,056 $ 2,772
Accrued liabilities 4,127 2,628
Debt 15,160 10,803
-------- --------
Total liabilities 22,343 16,203
Shareholders' equity:
Preferred stock, $0.01 stated value, 10,000,000 shares
authorized; no shares issued -- --
Common stock, $0.01 stated value, 70,000,000 shares
authorized; issued and outstanding 8,553,292 and 8,544,507 85 85
shares, respectively
Additional paid-in capital 27,963 27,925
Retained earnings (deficit) (1,728) 460
-------- --------
Total shareholders' equity 26,320 28,470
Commitments and contingencies
-------- --------
$ 48,663 $ 44,673
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Five Months Ended
---------------------------
December 31, December 31,
1998 1997
------------ ------------
(amounts in thousands, except
per share amounts)
<S> <C> <C>
Revenue:
Telecommunication services $ 13,288 $ 14,795
Telecommunication licensing 47 56
Direct call provisioning 1,595 878
Voice print 158 408
-------- --------
Total revenue 15,088 16,137
Expenses:
Operating costs and expenses
Telecommunications services 6,878 6,656
Direct call provisioning 1,503 835
Voice print 510 68
-------- --------
Total operating costs and expenses 8,891 7,559
Selling, general, and administrative 4,390 3,025
Research and development 1,036 978
Depreciation and amortization 3,289 3,507
-------- --------
Total expenses 17,606 15,069
Operating income (loss) (2,518) 1,068
Interest expense (420) (446)
-------- --------
Earnings (loss) before income taxes (2,938) 622
Income taxes 750 (155)
-------- --------
Net earnings (loss) $ (2,188) $ 467
======== ========
Basic earnings (loss) per common share $ (0.26) $ 0.06
======== ========
Diluted earnings (loss) per common share $ (0.26) $ 0.05
======== ========
Weighted average common shares
outstanding - basic 8,551 8,459
======== ========
Weighted average common shares
outstanding- diluted 8,551 9,126
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Common stock Additional Retained Total
------------------- paid-in earnings shareholders'
Shares Amounts capital (deficit) equity
------ ------- ---------- --------- -------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balances at August 1, 1997 8,314 $83 $26,908 $ (139) $ 26,852
Common stock issued upon
exercise of stock options 230 2 819 -- 821
Stock option tax benefit -- -- 198 -- 198
Net earnings -- -- -- 599 599
----- --- ------- ------- --------
Balances at July 31, 1998 8,544 85 27,925 460 28,470
Common stock issued upon
exercise of stock options 9 -- 38 -- 38
Net loss -- -- -- (2,188) (2,188)
----- --- ------- ------- --------
Balances at December 31, 1998 8,553 $85 $27,963 $(1,728) $ 26,320
===== === ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Five months ended December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------- -------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(2,188) $ 468
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,289 3,507
Provision for losses on accounts receivable 827 216
Write-down of capitalized software 490 --
Deferred tax (benefit) expense (750) 155
Changes in operating assets and liabilities, net of
acquisition of business:
Change in accounts receivable (2,044) 1,323
Change in prepaid expenses (108) (75)
Change in other assets (118) (182)
Change in accounts payable 284 739
Change in accrued liabilities 1,500 (843)
------- -------
Cash provided by operating activities 1,182 5,308
------- -------
Cash flows from investing activities:
Capital expenditures (2,023) (2,507)
Business acquisition, net of cash acquired (2,265) --
Other investing activities (726) (683)
------- -------
Cash used in investing activities (5,014) (3,190)
------- -------
Cash flows from financing activities:
Net proceeds (payments) under line of credit 3,872 (1,951)
Payments of debt (30) (224)
Common stock issued for cash under option plans 38 637
------- -------
Cash provided by financing activities 3,880 (1,538)
------- -------
Net decrease in cash and cash equivalents 48 580
Cash and cash equivalents at beginning of period 415 190
------- -------
Cash and cash equivalents at end of period $ 463 $ 770
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited financial statements
The accompanying unaudited consolidated financial statements reflect
all adjustments which, in the opinion of management, are necessary to
reflect a fair presentation of the financial position and results of
operations of T-NETIX, Inc. and subsidiaries (the Company) for the
interim periods presented. All adjustments, in the opinion of
management, are of a normal and recurring nature. Some adjustments
involve estimates, which may require revision in subsequent interim
periods or at year-end. The financial statements have been presented in
accordance with generally accepted accounting principles. Refer to
notes to consolidated financial statements, which appear in the 1998
Annual Report on Form 10-K for the company's accounting policies, which
are pertinent to these statements.
Year End
Effective December 1998, the Company changed its fiscal year from July
31 to December 31.
Research and Development
Costs associated with the research and development of new technology or
significantly altering existing technology are charged to operations as
incurred.
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed.
Under the standard, capitalization of software development costs begins
upon the establishment of technological feasibility, subject to net
realizable value considerations. Capitalized software costs are
amortized over the economic useful life of the software product, which
is generally estimated to be three years. The Company capitalized
$726,000 in software development costs for the five months ended
December 31, 1998.
SpeakEZ Operations
In December 1998, the Company began an evaluation of the SpeakEZ
Division and determined the best course of action was to combine its
research and development operations previously located in New Jersey
with its corporate operations in Englewood, Colorado. This change
coincided with the resignation of the Company's former chief executive
officer on December 9, 1998. This individual spent a majority of his
time in the SpeakEZ Division. The Company charged the cost the
severance agreement or approximately $240,000 to SpeakEZ selling,
general and administrative expense.
The Company intends to complete the reorganization of the SpeakEZ
operations by February 28, 1999. The reorganization also includes a
change in marketing strategy from a direct customer sales strategy to a
technology licensing strategy. Due to this change, forecasted revenue
for certain SpeakEZ software products was significantly decreased. As a
result, capitalized costs for certain software products at December 31,
1998 exceeded its estimated net realizable value. For the five months
ended December 31, 1998 the Company incurred a charge of $490,000 for a
reduction in the estimated net realizable value of these costs.
6
<PAGE> 8
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Also in the SpeakEZ Division, the Company recognized a loss on a note
receivable made to a venture partner for $300,000.
Acquisition
Effective December 31, 1998, the Company exercised its option to
acquire 100 percent of the common stock of Cell-Tel Monitoring, Inc
("Cell-Tel")., a Florida corporation. Cell-Tel engaged in the sales and
marketing and research and development of a prisoner/parolee electronic
monitoring device utilizing the Internet and using the Company's
SpeakEZ Voice Print(R) technology. The purchase price was approximately
$3.8 million, consisting of the conversion of $2.0 million of Cell-Tel
preferred stock and an additional $1.8 million in cash and acquisition
costs. The acquisition has been accounted for by the purchase method of
accounting and, accordingly the results of operations for Cell-Tel for
the period beginning January 1, 1999 will be included in the Company's
financial statements. Assets acquired and liabilities assumed have been
recorded at their estimated fair values, and are subject to adjustment
when additional information concerning asset and liability valuations
is finalized.
The excess of cost over the estimated fair value of net assets acquired
was allocated to goodwill. A total of $2,173,000 was allocated to
goodwill, which will be amortized on a straight-line basis over 7
years. The remaining net assets were allocated primarily to software
development costs and office equipment.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had taken place on
August 1, 1998 and 1997.
<TABLE>
<CAPTION>
FIVE MONTHS FIVE MONTHS
ENDED ENDED
(in thousands, except per share amounts) DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Revenue $ 15,088 $16,137
Net earnings (loss) (2,896) 353
Diluted earnings (loss) per common share (0.34) 0.04
</TABLE>
These pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the
results of operations which actually would have resulted had the
acquisition occurred in the date indicated, or which may result in the
future.
The Cell-Tel acquisition was funded by borrowings under the Company's
line of credit with its current commercial bank.
7
<PAGE> 9
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Earnings (loss) per common share
Earnings (loss) per common share for the five months ended December 31,
1998 and 1997, are presented in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128). SFAS 128 replaced the presentation of primary and fully
diluted earnings per share (EPS), with a presentation of basic EPS and
diluted EPS. Under SFAS 128, basic EPS excludes dilution for common
stock equivalents and is computed by dividing income or loss available
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. For the
five months ended December 31, 1998 common stock equivalents were not
included in the diluted EPS calculation as they would be anti-dilutive.
For the five months ended December 31, 1997, diluted common and common
equivalent shares outstanding includes 667,000 of common share
equivalents, consisting of stock options, determined under the treasury
stock method.
Income taxes
The Company's tax provision for the five months ended December 31, 1998
and 1997 was calculated using the estimated effective tax rate for the
fiscal year.
Supplemental disclosure to Statements of Cash Flows
During the five months ended December 31, 1998, the Company financed
certain capital expenditures for computer software licenses totaling
$504,000 through a capital lease.
8
<PAGE> 10
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Segment Information
The Company operated in two business segments; inmate calling services
and SpeakEZ Voice Print(R) .The Company's reportable segments are
specific business units that offer different products and services.
They are managed separately because each business requires different
technology and marketing strategies. Segment information for the five
months ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED DECEMBER 31, 1998
---------------------------------------
(AMOUNTS IN THOUSANDS)
INMATE CALLING
SERVICES SPEAKEZ TOTAL
-------------- ------- --------
<S> <C> <C> <C>
Revenue from external customers ......... $14,930 $ 158 $ 15,088
Operating income (loss) ................. 280 (2,798) (2,518)
Depreciation and amortization ........... 2,938 351 3,289
Interest expense ........................ 109 311 420
Segment earnings (loss) before taxes .... 171 (3,109) (2,938)
</TABLE>
<TABLE>
<CAPTION>
FIVE MONTHS ENDED DECEMBER 31, 1997
---------------------------------------
(AMOUNTS IN THOUSANDS)
INMATE CALLING
SERVICES SPEAKEZ TOTAL
-------------- ------- --------
<S> <C> <C> <C>
Revenue from external customers ......... $15,729 $ 408 $16,137
Operating income (loss) ................. 2,560 (1,492) 1,068
Depreciation and amortization ........... 3,127 380 3,507
Interest expense ........................ 200 246 446
Segment earnings (loss) before taxes .... 2,360 (1,738) 622
</TABLE>
There was no intersegment revenue for the five months ended December
31, 1998 and 1997. Unallocated amounts to arrive at net earnings
included income tax expense (benefit) of $(750,000) and $155,000 for
the five months ended December 31, 1998 and 1997, respectively.
Consolidated total assets included eliminations of $14,507,000 and
$12,509,000 as of December 31, 1998 and July 31, 1998, respectively.
Subsequent Event
On February 10, 1999, the Company signed a definitive Agreement and
Plan of Merger with Dallas-based Gateway Technologies, Inc., a
privately held provider of inmate telecommunications calling services
in a transaction valued at approximately $35.2 million. The merger is
anticipated to be completed by March 31, 1999. The merger will be
accounted for assuming the pooling of interests method of accounting.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For a comprehensive understanding of the Company's financial condition and
performance, this discussion should be considered within the context of the
consolidated financial statements and accompanying notes and other information
contained herein.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained in management's
discussion and analysis of financial condition and results of operations and
elsewhere in this Form 10-Q include forward-looking statements that involve
risks and uncertainties including, but not limited to, the demand for the
Company's products and services and market acceptance risks which may affect the
potential technological obsolescence of existing systems, the renewal of
existing site specific customer contracts, the ability to retain the base of
current site specific customer contracts, the continued relationship with
existing customers, the ability to reduce expenditures in its SpeakEZ Division
and to successfully license voice verification and fraud prevention technology,
the effect of economic conditions, the effect of regulation, including the
Telecommunications Act of 1996, the effect of the Year 2000 Issue, the impact of
competitive products and pricing, the Company's continuing ability to develop
hardware and software products, commercialization and technological
difficulties, manufacturing capacity and product supply constraints or
difficulties, actual purchases by current and prospective customers under
existing and expected agreements, and the results of financing efforts, along
with the other risks detailed herein.
OVERVIEW
INMATE CALLING SERVICES DIVISION
The Company derives revenue under contracts with its customers, including AT&T,
Bell Atlantic, U S WEST, SBC Communications, BellSouth, MCI WorldCom and GTE,
and other telecommunications service providers, primarily from the provisioning
of specialized call processing services for correctional facilities. This
revenue is generated under long-term contracts, which provide for transaction
fees paid on a per-call basis. The Company is paid a prescribed fee for each
call completed and additional fees for validating phone numbers dialed by
inmates. The Company also derives revenue as a direct provider of inmate calls.
The following table sets forth certain information concerning the accepted calls
processed by the Company for its customers in the inmate calling market and
excludes direct call provisioning.
<TABLE>
<CAPTION>
Five Months Ended
----------------------------
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Call volumes processed 36,276,000 39,131,000
Average daily transactions 237,000 256,000
</TABLE>
The Company had a net reduction in call volume in 1998 as a result of prisoner
relocation programs, increased use of call control measures by correctional
institutions, and non-renewal of some existing site specific customer contracts
in competitive bidding arrangements. These factors were partially
10
<PAGE> 12
offset by increases associated with the addition of new call processing systems.
The Company will continue to market its services to additional call providers;
however, it expects growth in call processing volumes will come predominantly
from adding new systems for existing customers.
SPEAKEZ DIVISION
In December 1998, the Company began an evaluation of the SpeakEZ Division and
determined the best course of action was to combine its research and development
operations previously located in New Jersey with its corporate operations in
Englewood, Colorado. This change coincided with the resignation of the Company's
former chief executive officer on December 9, 1998. This individual spent a
majority of his time in the SpeakEZ Division. The Company charged the cost the
severance agreement or approximately $240,000 to SpeakEZ selling, general and
administrative expense.
The Company intends to complete the reorganization of the SpeakEZ operations by
February 28, 1999. The reorganization also includes a change in marketing
strategy from a direct customer sales strategy to a technology licensing
strategy. Due to this change, forecasted revenue for certain SpeakEZ software
products was significantly decreased. As a result, capitalized costs for certain
software products at December 31, 1998 exceeded its estimated net realizable
value. For the five months ended December 31, 1998 the Company incurred a charge
of $490,000 for a reduction in the estimated net realizable value of these
costs.
Even with the changes in marketing strategy, there can be no assurance that the
SpeakEZ products will achieve the necessary market acceptance or become widely
adopted. The market for speaker verification software has only recently begun to
develop. As is typical in the case of a new and rapidly evolving market, demand
and market acceptance for recently introduced products and services are subject
to a high level of uncertainty. Voice print revenue for the Company has been
minimal to date. There is no assurance that the SpeakEZ products will be
commercially accepted or profitable in the future.
11
<PAGE> 13
RESULTS OF OPERATIONS
Five Months Ended December 31, 1998 and 1997
The following table sets forth certain statement of operations data as
a percentage of total revenue for the five months ended December 31, 1998 and
1997.
<TABLE>
<CAPTION>
FIVE MONTHS ENDED DECEMBER 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenue:
Telecommunications services................ 88% 92%
Telecommunications licensing............... 1 -
Direct call provisioning................... 10 5
Voice print................................ 1 3
---- ----
Total revenue.......................... 100 100
Expenses:
Operating costs and expenses............... 59 47
Selling, general and administrative........ 29 19
Research and development................... 7 6
Depreciation and amortization.............. 22 21
---- ----
Operating income (loss) ................. (17) 7
Interest expense........................... (3) (3)
---- ----
Earnings (loss) before income taxes...... (20) 4
Income taxes ............................ 5 (1)
---- ----
Net earnings (loss) ..................... (15)% 3%
==== ====
</TABLE>
Total Revenue. Total revenue decreased 7% to $15,088,000 for the five months
ended December 31, 1998, from $16,137,000 for the prior year. This decrease
resulted from decreases in telecommunications services revenue and voice print
revenue, offset by an increase in direct call provisioning revenue. The 10%
decrease in telecommunications services revenue to $13,288,000 for the five
months ended December 31, 1998, from $14,795,000 in the prior year, was due
primarily to a 7% decrease in call volume. The net reduction in call volumes is
comprised of decreases as a result of prisoner relocation programs, increased
use of call control measures by correctional institutions, and non-renewal of
existing site specific customers contracts in competitive bidding arrangements.
These factors were partially offset by increases associated with the addition of
new call processing systems.
Direct call provisioning revenue increased 82% to $1,595,000 for the five months
ended December 31, 1998 from $878,000 for the prior period. This increase was
due to the addition of sites in which the Company is provisioning the long
distance service. The Company's ability to increase direct call provisioning
revenue in the future is tied, in part, to the continued provisioning of long
distance service on certain site contracts. There can be no assurance that the
Company will be successful in increasing the number of sites serviced. The
Company also recognized SpeakEZ Voice Print(R) revenue in the amount of $158,000
for the five months ended December 31, 1998 or a decrease of $250,000 from the
corresponding prior period. SpeakEZ Voice Print(R) revenue was derived primarily
from the provisioning of services and from the sale of software licenses and
hardware systems, and software development kits. Approximately $60,000 of the
SpeakEZ revenue for the five months ended December 31, 1998 was for a government
project that ended in November 1998. Future amounts of voice print revenue are
unpredictable and depend upon market acceptance, technological success, and
impact of new competition.
12
<PAGE> 14
Operating costs and expenses. Total operating costs and expenses increased to
$8,891,000 for the five months ended December 31, 1998, from $7,559,000 for the
corresponding prior period, and increased as a percentage of total revenue to
59% for the five months ended December 31, 1998 from 47% for the corresponding
prior period. The operating costs and expenses included a charge for a reduction
to the estimated net realizable value of certain SpeakEZ related capitalized
software development costs of $490,000 or 3% of total revenue. The remaining
increase was due an overall change in the revenue mix to include a greater
portion of direct call provisioning revenue and expenses and a lesser amount of
telecommunications services revenue and expenses. Operating costs and expenses
of telecommunications services primarily consist of service administration costs
for correctional facilities, including salaries and related personnel expenses,
communication costs and inmate calling systems repair and maintenance expense.
Operating costs and expenses of telecommunications services also include costs
associated with call verification procedures, primarily network expenses and
database access charges. The Company invoices these verification procedure costs
to its customers with minimal margins. There were minimal costs directly
associated with telecommunications licensing revenue. Operating costs and
expenses associated with direct call provisioning include the costs associated
with telephone line access, long distance charges, commissions paid to
correctional facilities, costs associated with uncollectible accounts and
billing charges. Voice print operating costs for the five months ended December
31, 1998 include the cost of hardware systems sold, a charge for a reduction to
the estimated net realizable value of certain capitalized software development
costs, installation costs, and royalty charges.
The following table sets forth the operating costs and expenses for
each type of revenue as a percentage of corresponding revenue for the five
months ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
FIVE MONTHS ENDED DECEMBER 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Operating costs and expenses:
Telecommunications services................... 52% 45%
Direct call provisioning...................... 94 95
Voice print .............................. 323 17
</TABLE>
Operating costs and expenses associated with providing telecommunications
services increased as a percentage of corresponding revenue to 52% for the five
months ended December 31, 1998, from 45% in the corresponding prior period. The
increase is primarily due to the reduction in telecommunications services
revenue and increases in personnel and telecommunications related costs. Direct
call provisioning costs decreased to 94% for the five months ended December 31,
1998 from 95% in the corresponding prior period. This percentage decrease is
primarily attributable to an increase in higher margin long distance related
direct call provisioning revenue. Most of the cost components have remained
consistent. The increase in SpeakEZ operating expenses is due to a charge for
$490,000 associated with certain capitalized software development projects which
were written down to their estimated net realizable value.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $4,390,000 for the five months ended
December 31, 1998, from $3,025,000 in the corresponding prior period, and
increased as a percentage of total revenue to 29% from 19% in the corresponding
prior period. Selling, general and administrative expenses associated with the
ICS Division increased
13
<PAGE> 15
by $740,000 to $2,942,000 for the five months ended December 31, 1998 from
$2,202,000 for the corresponding prior period. The increase was primarily due to
increases in salary and related infrastructure costs of $352,000 and
professional services and consulting fees of $343,000. Selling, general and
administrative expenses for the ICS Division are expected to increase in order
to support the new operations associated with the acquisition of Cell-Tel
Monitoring, Inc. (now T-NETIX Monitoring Corp.). Selling, general and
administrative expenses associated with the SpeakEZ Voice Print(R) technology
were $1,448,000 for the five months ended December 31, 1998 as compared to
$823,000 for the corresponding prior period. The increase was due primarily to
$240,000 in severance expenses and $300,000 for the loss on a note receivable to
a venture partner. The Company anticipates a reduction in the administrative
costs associated with SpeakEZ due to the consolidation of corporate facilities.
There is also expected to be a reduction in sales and marketing costs due to the
change in the software sales strategy and a reduction in personnel. The Company
believes it can implement these reductions without sacrificing potential revenue
growth. There can be no assurance, however, that due to the potential lack of
market acceptance, risk of technological success, or impact of new competition
that revenue will grow at the same rate as that anticipated for selling, general
and administrative expenses.
Research and Development Expenses. Research and development expenses increased
to $1,036,000 for the five months ended December 31, 1998, from $978,000 in the
corresponding prior period. The research and development for the Inmate Calling
Services division increased to $389,000 for the five months ended December 31,
1998, from $349,000 in the corresponding prior period. For the five months ended
December 31, 1998, the Company capitalized $633,000 of computer software
development costs associated with the development of a new inmate calling
platform compared to $191,000 for the corresponding prior period. The Company
expects research and development expense for the ICS Division to increase to
support new products and due to the increase in technical personnel from the
Cell-Tel acquisition. The research and development expense associated with the
SpeakEZ Voice Print(R) technology was $647,000 for the five months ended
December 31, 1998 as compared to $629,000 for the corresponding prior period.
For the five months ended December 31, 1998, the Company capitalized $93,000 of
computer software development costs associated with the SpeakEZ Voice Print(R)
technology compared to $142,000 for the corresponding prior period. In addition,
under a government contract, the Company is partially reimbursed for expenses on
this project. This reimbursement totaled approximately $65,000 for the five
months ended December 31, 1998 and was recognized as a reduction to SpeakEZ
Voice Print(R) technology related research and development expenses. Such
reimbursements were $138,000 for the corresponding prior period. The research
and development expense associated with the SpeakEZ Voice Print(R) technology is
also expected to decrease due to the consolidation of research facilities and
personnel reductions as a result of the Company's change in marketing strategy
for SpeakEZ.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
decreased to $3,289,000 for the five months ended December 31, 1998, from
$3,507,000 in the corresponding prior period. The decrease is due to a net
reduction in depreciation expense associated with telecommunications equipment
due to certain assets being fully depreciated, partially offset by an increase
in depreciation on office equipment and increased amortization of intangibles.
The depreciation and amortization for the SpeakEZ Division was $351,000 for the
five months ended December 31, 1998 as compared to $380,000 for the
corresponding prior period. The Company anticipates that depreciation expense
will increase as new sites are added, however it will be offset to the extent
that equipment currently in use becomes fully depreciated.
14
<PAGE> 16
Interest Expense. Interest expense decreased to $420,000 for the five months
ended December 31, 1998, from $446,000 in the corresponding prior period. The
decrease was attributable to a combination of a reduction in the average balance
of indebtedness and a reduction in interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied upon commercial borrowings and operating
cash flow to fund its operations and capital needs. Cash provided by financing
activities supplied the Company with a majority of its cash needs for the five
months ended December 31, 1998. The net cash provided by financing activities
was $3,880,000 for the five months ended December 31, 1998 compared to cash used
in financing activities of $1,538,000 for the corresponding prior period. Cash
provided by operations was $1,182,000 for the five months ended December 31,
1998 as compared to cash provided by operations of $5,308,000 for the
corresponding prior period. The change in cash provided by operations was
primarily attributable to changes in net earnings, adjusted for noncash expense
items such as depreciation and amortization, provision for losses on accounts
receivable, write-off of capitalized software and the change in the Company's
deferred tax provision. Comparably, these net amounts totaled $3,856,000 for the
five months ended December 31, 1998 and $3,878,000 for the corresponding prior
period. The net change in operating assets and liabilities was the other
offsetting difference in the change in cash provided by operations. The total
change for the five months ended December 31, 1998 was made up primarily of
increases in accounts receivable of $2,044,000 offset by decreases in accounts
payable and accrued liabilities of $284,000 and $1,500,000, respectively. The
total change for the five months ended December 31, 1997 was made up primarily
of decreases in accounts receivable of $1,323,000 and accrued liabilities of
$843,000 and increases in accounts payable of $739,000.
Cash used in investing activities was $5,014,000. This included capital
expenditures of $2,023,000 for the five months ended December 31, 1998 as
compared to $2,507,000 in the corresponding prior period. The capital
expenditures for the five months ended December 31, 1998 were mainly for
telecommunications equipment and office equipment. Additional investing
activities of $726,000 for the five months ended December 31, 1998 was for
capitalized software development costs. Other investing activities of $683,000
for the five months ended December 31, 1997 included expenditures for
investments in preferred stock of Cell-Tel Monitoring, Inc. and capitalized
software development costs. In 1998 the Company acquired Cell-Tel Monitoring,
Inc. and its home incarceration and probation administration product, Containsm.
The additional expenditures for the purchase price and acquisition costs
associated with the purchase of the common stock of Cell-Tel were $2,265,000.
The Company anticipates that capital expenditures for telecommunications
equipment will primarily follow the installation of new systems and will
increase as the current base of systems are upgraded to provide increased
functional ability and to be compliant with FCC regulations regarding rate
announcements.
The Company has been funding its operations by using cash provided by operations
and available borrowings under a $20,000,000 line of credit. Management believes
that the credit facility should be sufficient to fund the Company's operations
and anticipated new inmate call processing systems, upgrades of existing
systems, and potential installations for SpeakEZ Voice Print(R) for the
foreseeable future. If the borrowing facilities and cash from operations are
insufficient to satisfy the Company's requirements, the Company may be required
to sell additional equity securities or extend its borrowing facilities. There
can be no assurance that such financing will be available or, if available, will
be obtainable on satisfactory terms.
15
<PAGE> 17
THE YEAR 2000 ISSUE
The Problem. The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable year. As a
result, any of the Company's computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations of the Company and its suppliers and customers.
The Company's State of Readiness. The Company has instituted a Year 2000
Project. As part of the Company's Year 2000 Project, the Company hired
additional project management resources. Additionally, the Company has completed
its initial evaluation of current computer systems, software, and embedded
technologies. The evaluation revealed that the Company's current proprietary
inmate calling platform deployed on behalf of the Company's customers, the
internal network hardware and operating system that provides the Company's Local
Area Network ("LAN") and Wide Area Network ("WAN"), voice mail system, and
accounting and business process software are the major resources that do have
Year 2000 compliance issues. These resources will need to be either replaced or
upgraded. Pursuant to the FCC Order 98-7, associated with the requirement for
rate quotes, the Company's inmate calling system must be upgraded by October
1999. As a result of this upgrade, the inmate calling system will be Year 2000
compliant. The Company's internal systems and or programs are predominantly
"off-the-shelf" products with Year 2000 versions now available. The Company's
internal network, e-mail system and accounting and business process software are
scheduled for update utilizing vendor provided upgrades by June 1999.
As part of the Company's Year 2000 Project, the Company plans to contact its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue. The communications are planned to be completed by February
1999. However, there can be no guarantee that the systems of other companies on
which the Company's business relies will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems would not have a material adverse effect on the Company and
its operations.
The Costs to Address the Company's Year 2000 Issues. Expenditures for the five
months ended December 31, 1998 for the Year 2000 Project amounted to
approximately $100,000. Management expects that the completion of its Year 2000
Project may result in additional expenditures of approximately $600,000. The
estimated replacement cost of certain network equipment associated with the WAN
portion of the internal network could be an additional $500,000.
The Risks Associated with the Company's Year 2000 Issues. The Company's failure
to resolve Year 2000 Issues on or before December 31, 1999 could result in
system failures or miscalculations causing disruption in operations, including
among other things, a temporary inability to process transactions, send
invoices, send and/or receive e-mail and voice mail, or engage in normal
business activities. Additionally, failure of third parties upon whom the
Company's business relies to timely remediate their Year 2000 Issues could
result in disruptions in the Company's supply of network parts and materials,
late, missed, or unapplied payments, temporary disruptions in order processing
and other general problems related to the Company's daily operations. While the
Company believes its Year 2000 Project will adequately address the Company's
internal Year 2000 issues, until the Company receives responses from a
significant number of the Company's suppliers and customers, the overall risks
associated with the Year 2000 Issue remain difficult to accurately describe and
quantify, and there can be no guarantee that the Year 2000 Issue will not have a
material adverse effect on the Company and its operations.
16
<PAGE> 18
The Company's Contingency Plan. The Company has not, to date, implemented a Year
2000 Contingency Plan. It is the Company's goal to have the major Year 2000
Issues resolved by December, 1999. Final Year 2000 verification and validation
risk assessment is scheduled to occur April 1999. However, the Company would
expect to develop and implement a contingency plan by the end of March, 1999, in
the event the Company's Year 2000 Project should fall behind schedule.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
17
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
27 Financial Data Schedule
B. Reports on Form 8-K
The Company filed a Form 8-K dated December 9, 1998 reporting
the following:
Item 5. Resignation of the Company's chief executive
officer and chairman of the board and appointment
of new chief executive officer and new chairman.
Item 8. The Company's fiscal year end was changed from
July 31 to December 31 effective December 31, 1998.
The Company filed a Form 8-K dated December 31, 1998 reporting
the following:
Item 2. Acquisition of 100% of the common stock of
Cell-Tel Monitoring, Inc, in a transaction to be
accounted for utilizing the purchase method of
accounting.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
T-NETIX, Inc.
-------------
(Registrant)
Date: February 11, 1999 By: /s/ Alvyn A. Schopp
----------------- -----------------------------------
(Signature)
Alvyn A. Schopp, Chief Executive Officer
By: /s/ John Giannaula
-----------------------------------
(Signature)
John Giannaula, Vice President Finance
(Principal Accounting Officer)
19
<PAGE> 21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN T-NETIX, INC.'S TRANSITION REPORT ON FORM 10Q-T FOR THE
FIVE MONTHS ENDED DECEMBER 31, 1998. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> AUG-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 463
<SECURITIES> 0
<RECEIVABLES> 12,460
<ALLOWANCES> 950
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 53,275
<DEPRECIATION> 27,728
<TOTAL-ASSETS> 48,663
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 26,235
<TOTAL-LIABILITY-AND-EQUITY> 48,663
<SALES> 0
<TOTAL-REVENUES> 15,088
<CGS> 0
<TOTAL-COSTS> 8,891
<OTHER-EXPENSES> 8,715
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 420
<INCOME-PRETAX> (2,938)
<INCOME-TAX> 750
<INCOME-CONTINUING> (2,188)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,188)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
